Ailing Ireland Accepts Bailout

Nation Asks EU, IMF for Tens of Billions to Boost Banks and Public Finances

By

Marcus Walker,

Charles Forelle and

David Enrich

Updated Nov. 22, 2010 12:01 a.m. ET

Ireland finally sought tens of billions in bailout money from the European Union and the International Monetary Fund after weeks of bickering that has exposed the limits of Europe's attempt to restore financial markets' confidence in the stability of its single currency.

The deal between Ireland and the EU took shape Sunday as EU finance ministers backed Ireland's request for a three-year package of loans totaling roughly €80 billion ($110 billion), according to people familiar with the matter. The size of the package could change, as talks with Ireland are still at an early stage, the people said.

The Irish rescue marks the latest escalation in Europe's effort to keep its 16-member common currency from unraveling. The crisis began late last year after Greece acknowledged that its budget deficit figures were inaccurate, triggering ratings downgrades and raising concerns about the creditworthiness of other European countries.

Ireland's banking and budget crisis is the first test of the €750 billion system of rescue loans for indebted euro-zone countries set up by the EU and IMF this spring after they pulled Greece from near bankruptcy with a €110 billion loan package.

ENLARGE

A protester is arrested by Irish Police after he stopped the car carrying the minister for tourism, culture and sport, Mary Hanafin as she arrived for a cabinet meeting in Dublin, Ireland on Sunday.
Agence France-Presse/Getty Images

The IMF has been providing aid to indebted countries for decades, but for its part, the EU had hoped its new emergency fund would never be needed. When it was established earlier this year, many leaders argued that its existence alone would be enough to reassure markets that countries wouldn't be caught unable to pay off their debts.

In Ireland's case, using the fund has proved to be much more difficult than anyone had anticipated. Instead of welcoming the aid, Ireland—reluctant to give up control of its tax and spending policies—caught other EU nations off guard by fiercely resisting help. Rather than setting an example of how the bailout mechanism could lay concerns to rest, the process unsettled markets and exposed the difficulty Europe has in showing a united front. That has fueled concerns that investors will now begin to batter the euro zone's other weak members, especially Portugal and Spain.

The Irish government bowed over the weekend to the rising pressure from the EU and financial markets, conceding it needs outside help to shore up its public finances and ailing banks. But Irish officials said they hadn't backed away from their insistence that the country be allowed to preserve its 12.5% corporate tax rate—which German and France view as an unfair way of luring companies to Ireland at other European countries' expense.

German Finance Minister Wolfgang Schäuble on Sunday said Ireland "will have to meet strict conditions," without naming specific measures. He added that many euro-zone countries had been calling on Ireland to seek a bailout because "the risk of contagion is rising, the longer it takes" for Ireland to act. However, Mr. Schäuble told German television broadcaster ZDF, "one can't be certain" that an Irish bailout would relieve the pressure on other struggling euro members.

Ireland's aid request and its endorsement by EU governments open the way to formal negotiations on a package of loans from two European lending facilities and the IMF, as well as the U.K. and Sweden, which said over the weekend that they stand ready to help Ireland.

The rescue package for Ireland is aimed at helping the country to repair its budget as well as its stricken banking system. Irish Finance Minister Brian Lenihan said the international aid would ensure that Dublin would be able to both fund its budget deficit and help Irish banks cope with rising losses on their loan portfolios.

Ireland is expected on Tuesday to unveil its own four-year plan for budget cuts, and Dublin is fighting to prevent the imposition of yet stiffer budget cuts as the condition of aid.

As part of the rescue package, Ireland's government will order a fresh restructuring of the country's battered banking industry, Prime Minister Brian Cowen told reporters in Dublin late Sunday. The banks "will become considerably smaller," Mr. Cowen said. That is likely to result in the country's two largest lenders—Bank of Ireland and Allied Irish Banks PLC—being forced to downsize. Mr. Lenihan said the banks likely will have to unload "nonessential assets," including overseas operations and other as-yet-undetermined businesses that aren't directly related to supporting the Irish economy.

Most of the funds aimed for Irish banks will become part of a "standby facility" available to replenish the banks' cash cushions if new losses flare up, the Irish government said. The goal is to leave the banks sufficiently flush with cash that it erases investor doubts about whether they will be overwhelmed by a flood of bad loans. The anticipated capital infusions are likely to increase the government's already-considerable ownership of its top banks, Mr. Lenihan said.

The Washington-based IMF is expected to provide roughly one-third of the loans for Ireland. The largest component is expected to come from the European Financial Stability Facility, the €440 billion entity set up this summer by euro-zone governments. The rest of the funds would come from the EU's executive arm, the European Commission, and through bilateral loans from the U.K. and Sweden, which are members of the EU but which don't use the euro as their currency.

Germany is expected to be the largest contributor to the Irish bailout, thanks to Germany's large share of the EFSF.

An early and rough estimate of the U.K.'s portion of the bailout is around £7 billion ($11 billion), including Britain's share of IMF and EU funding and its own bilateral loans, a person familiar with the matter said.

U.K. Treasury chief George Osborne took part in Sunday's discussions with euro-zone finance ministers, in a mark of how Britain has found itself closely involved in the decision-making of the single-currency bloc that it has always shunned.

Ireland asked for help only after two weeks of intense pressure from other euro-zone governments, which were worried about financial panic spreading to other countries. Europe's main bailout fund requires indebted countries to apply for aid, a rule that allowed Ireland to delay a deal until signs of investor flight from Irish banks left it no choice.

Observers warn that the aid package for Ireland might not succeed in reassuring financial markets about the solvency of Portugal and Spain, which also face daunting repairs to their public finances, and in Spain's case, severe banking strains due to the bursting of a property bubble similar to Ireland's.

Ireland's call for help marks a climb-down for the country's government, which insisted as recently as last week that it didn't need money. One Irish cabinet minister described reports of bailout talks as "total fiction."

But Ireland has been hemorrhaging cash, and with markets scorning Irish government debt, the country's insistence that it could limp through until the middle of 2011 and hope things got better was viewed dimly by the rest of Europe.

Fueling the worries is the vast uncertainty over the cost of rescuing Irish banks. Ireland has promised capital injections of €50 billion—nearly a third of one year's economic output—but markets still doubt that that will be enough to cushion all of the banks' potential losses.

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